Macroeconomic models that are based on either the rational expectations hypothesis (REH) or behavioral considerations share a core premise: All future market outcomes can be characterized ex ante with a single overarching probability distribution. This paper assesses the empirical relevance of this premise using a novel data set. The authors find that Knightian uncertainty, which cannot be reduced to a probability distribution, underpins outcomes in the stock market. This finding reveals the full implications of Robert Shiller's ground-breaking rejection of the class of REH present-value models that rely on the consumption-based specification of the risk premium. The relevance of Knightian uncertainty is inconsistent with all REH models, regardless of how they specify the market's risk premium. The authors' evidence is also inconsistent with bubble accounts of REH models' empirical difficulties. They consider a present-value model based on a New Rational Expectations Hypothesis, which recognizes the relevance of Knightian uncertainty in driving outcomes in real-world markets. Their novel data is supportive of the model's implications that rational forecasting relies on both fundamental and psychological factors.

'Animal spirits' is a term that describes the instincts and emotions driving human behaviour in economic settings. In recent years, this concept has been discussed in relation to the emerging field of narrative economics. When unscheduled events hit the stock market, from corporate scandals and technological breakthroughs to recessions and pandemics, relationships driving returns change in unforeseeable ways. To deal with uncertainty, investors engage in narratives which simplify the complexity of real-time, non-routine change. This book assesses the novelty-narrative hypothesis for the U.S. stock market by conducting a comprehensive investigation of unscheduled events using big data textual analysis of financial news. This important contribution to the field of narrative economics finds that major macro events and associated narratives spill over into the churning stream of corporate novelty and sub-narratives, spawning different forms of unforeseeable stock market instability.

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This paper presents a theoretical and empirical analysis of the effects of environmental regulation on bilateral trade volume. We use a gravity model of trade flows and find weak evidence that differences in regulation are a source of comparative advantage. We also find evidence against the race-to-the-bottom hypothesis in that increases in standards in both high and low standard countries increase bilateral trade volume. We use 1999 data on GDP, population, and environmental stringency for 39 countries.